I’ve said for a long time my gut says the prediction markets are on the right side of the law JS
A landmark circuit court ruling issued yesterday hands prediction markets a federal preemption shield — and lands directly on top of Kentucky’s HB 904. The legal architecture that states built to contain this product just developed its first major crack at the appellate level.
On April 6, 2026 — yesterday — the United States Court of Appeals for the Third Circuit issued a 2-1 ruling in KalshiEX LLC v. Flaherty that will be argued about in law schools, gaming commission boardrooms, and racing industry conference rooms for years. We have been covering the terrain this ruling crosses for a long time. Over a decade. Let’s talk about what it actually says, what it doesn’t resolve, and why horse racing — specifically the Kentucky legislature — needs to understand what just happened.
The short version: a federal appeals court, for the first time at the circuit level, ruled that prediction market contracts offered by a CFTC-licensed designated contract market are federally preempted from state gambling regulation. New Jersey tried to shut Kalshi down. The Third Circuit said New Jersey doesn’t have that authority. The Commodity Exchange Act does.
That is not a minor procedural footnote. That is a structural ruling about who governs a new class of wagering product — and the answer, at least in the Third Circuit, is Washington, not Trenton. Or Columbus. Or Frankfort.
The first federal circuit court to rule on prediction market preemption ruled for federal jurisdiction. That changes every state-level calculation overnight.
WHAT THE COURT ACTUALLY SAID
The case has a clean factual spine. New Jersey’s Division of Gaming Enforcement issued Kalshi a cease-and-desist in early 2025, asserting that its sports-event contracts constituted unauthorized sports wagering under state law. Kalshi filed suit, arguing that as a CFTC-licensed designated contract market, it operates under the Commodity Exchange Act — and that federal law preempts state gambling regulation of its products. A district court agreed and granted a preliminary injunction. New Jersey appealed to the Third Circuit.
Judge David J. Porter wrote the majority opinion. The core holding is direct. New Jersey was framing the legal question as whether the state could regulate all sports gambling within its borders. The majority rejected that framing.
“New Jersey frames the issue broadly (regulating all sports gambling) rather than narrowly (regulating trading on federally designated contract markets). The text of the Act suggests that the narrow framing is the better reading. The Act preempts state laws that directly interfere with swaps traded on DCMs. Kalshi’s sports-related event contracts are swaps traded on a CFTC-licensed DCM, so the CFTC has exclusive jurisdiction.”
That is field preemption and conflict preemption applied simultaneously. The majority found both doctrines support Kalshi’s position. The CFTC, by licensing Kalshi as a designated contract market and not acting to prohibit its sports contracts under its public interest authority, has effectively blessed the product for national operation. States cannot override that federal approval by recharacterizing the contracts as gambling.
The dissent, written by Judge Jane R. Roth, was pointed and deserves to be understood — because it is the argument that states will keep pressing in other circuits. Roth called the majority’s reasoning a “performative sleight” and wrote that Kalshi’s products are “virtually indistinguishable from the betting products available on online sportsbooks, such as DraftKings and FanDuel.” She warned that the majority’s logic, carried to its conclusion, would preempt all state and tribal gambling regulation for any product structured as a DCM swap — a consequence the majority avoided confronting directly.
That dissent matters because it is the roadmap for the states going forward: argue that the majority’s logic proves too much, that Congress never intended the 2010 Dodd-Frank swap definition to quietly strip states of their traditional police power over gambling, and push for Supreme Court review. New Jersey’s attorney general was explicit: they are evaluating all options, and they are coordinating with other states facing the same challenge.
THE CIRCUIT SPLIT IS REAL — AND THAT’S THE STORY
Anyone who reads only the Kalshi press release — and Kalshi CEO Tarek Mansour was quick on social media, declaring that free markets work and this is a big win — is getting an incomplete picture. This ruling is significant, but it does not end the legal war. It escalates it.
The Third Circuit ruled for Kalshi. The Ninth Circuit recently declined to block Nevada’s enforcement action, clearing the way for that state to obtain a restraining order against the platform. A Massachusetts state court ruled that Kalshi’s contracts are subject to state gaming law. A Maryland federal district court denied Kalshi’s preliminary injunction, emphasizing the strong presumption against federal preemption in areas of traditional state authority like gambling.
You now have a genuine circuit split in the making — Third Circuit for preemption, Ninth Circuit permitting state enforcement, Fourth Circuit appeal still pending from the Maryland ruling. When circuits disagree on a constitutional question of this magnitude, the case for Supreme Court review writes itself. This is almost certainly heading to One First Street, and it may get there before a final ruling on the merits reaches any circuit.
Third Circuit says federal law wins. Ninth Circuit lets Nevada enforce. Maryland sided with the state. This is a Supreme Court case. The only question is when.
What this means practically, right now, is a patchwork. Kalshi operates freely in states covered by favorable federal rulings and faces enforcement risk in states where courts have sided with regulators or where appeals are pending. The company reported over a billion dollars in weekly trading volume in New Jersey alone — and that number will grow in jurisdictions where the preemption shield holds. It contracts sharply where states retain enforcement authority.
NOW READ KENTUCKY HB 904 AGAIN
Past The Wire has covered Kentucky HB 904 in depth across multiple pieces — the Jockey Club registration provisions, the fixed-odds wagering framework, and most critically, Section 25: the provision that would prohibit any entity holding a Kentucky horse racing, sports wagering, or fantasy contest license from affiliating with a prediction market platform, with a national reach clause extending that prohibition to prediction market activity anywhere in the United States effective July 2027.
That provision was already the most constitutionally aggressive piece of the bill when we reported on it. The Third Circuit ruling makes it more vulnerable, not less.
Here is the pressure point. Kentucky’s Section 25 does not directly regulate Kalshi. It regulates Kentucky licensees — tracks, sportsbooks, ADWs — by prohibiting their affiliation with prediction market platforms. That indirect regulatory structure was presumably designed to sidestep the preemption argument: Kentucky isn’t banning Kalshi, it’s conditioning its own licenses.
But the Third Circuit’s reasoning doesn’t stop at direct regulation. The majority held that state laws which “directly interfere” with trading on CFTC-licensed DCMs are preempted. A statute that makes it economically impossible for major sportsbook operators — FanDuel, DraftKings, Fanatics, all of whom hold Kentucky racing licenses — to affiliate with federally approved prediction market platforms arguably interferes with the federal DCM ecosystem just as directly as a cease-and-desist order. The indirect structure of the prohibition does not necessarily change the interference analysis.
Whether a court would agree with that argument is genuinely uncertain. The Third Circuit’s ruling is a preliminary injunction decision, not a final merits ruling. The Supreme Court has not spoken. The circuit split may resolve differently. But any Kentucky licensee’s legal team reading yesterday’s ruling is having a conversation this week about whether Section 25’s national affiliation prohibition survives contact with the Third Circuit’s preemption framework. That conversation was not happening at the same volume last week.
Section 25 was already the most legally aggressive provision in HB 904. The Third Circuit ruling just handed Kalshi’s lawyers a loaded brief.
THE DEEPER RACING INDUSTRY IMPLICATION
We have advocated for exchange wagering and fixed-odds products in horse racing since 2014. The argument has always been the same: the pari-mutuel model’s structural deficiencies cannot be fixed from inside the pari-mutuel model. You need a parallel product architecture that competes on merit, gives the knowledgeable bettor a locked price and transparent market, and draws in the serious wagering capital that has been leaving racing for a decade.
Prediction markets are, functionally, the exchange-style product the racing industry refused to build. Kalshi’s sports contracts are binary event markets. They settle on outcomes. They offer transparent pricing. They are accessible nationally without a track-by-track signal fee negotiation or an ADW licensing arrangement. They are everything that exchange wagering advocates argued for, built outside the racing industry’s permission structure entirely — which is exactly why the industry’s instinct has been to contain them rather than engage them.
The Third Circuit just made containment harder. And the 2010 Dodd-Frank amendment to the Commodity Exchange Act — the statutory hook the majority relied on — was not written with horse racing in mind. It was written to regulate financial derivatives after the 2008 crisis. Kalshi’s genius, if you want to call it that, was recognizing that its product architecture qualified under a federal regulatory framework built for an entirely different purpose. The CFTC license is not a gaming license. It is a derivatives exchange license. And the Third Circuit just said that distinction matters, a great deal, when states try to enforce their gambling laws against it.
The racing industry’s governance class — the same entities we have documented hoarding reserves while the daily game hollows out, litigating over fee methodologies in sealed settlements, and refusing public accountability forums — built the political architecture of HB 904’s prediction market provisions to protect pari-mutuel primacy. They lobbied for Section 25. They framed prediction markets as an unlicensed competitive threat that needed to be contained at the state level.
Yesterday, a federal circuit court told them that state-level containment has legal limits. The CFTC’s jurisdiction over designated contract markets is not a courtesy. It is a federal preemption shield. And shield, by definition, deflects what is aimed at it.
WHAT COMES NEXT
New Jersey is evaluating en banc review and Supreme Court appeal. Other states — the attorney general was explicit about coordinating with colleagues facing similar challenges — will watch whether the Third Circuit’s reasoning holds under en banc scrutiny before committing resources to the same argument elsewhere.
The Fourth Circuit has the Maryland appeal. The Ninth Circuit has the Nevada appeal. Both will now write with the Third Circuit’s majority opinion in front of them — and with Roth’s dissent as the template for disagreeing with it. If the Fourth Circuit sides with Maryland and rules against preemption, the circuit split becomes explicit and the Supreme Court petition practically files itself.
For Kentucky specifically: HB 904 is now in the Governor’s hands. The prediction market provisions — both the affiliation prohibition and the 2027 national reach clause — were already the subject of operator threats to exit the state. The Third Circuit ruling adds a second pressure point: those provisions now face a more credible constitutional challenge than they did forty-eight hours ago.
For the racing industry broadly: the product architecture that prediction markets represent is not going away. It is federally licensed, capitalized, growing, and now armed with the first circuit-level preemption ruling in its favor. The question is not whether prediction markets exist alongside pari-mutuel racing. The question — the one the industry’s governance class has never been willing to answer honestly — is whether the sport engages this product category on its own terms or watches it continue to develop entirely outside the racing industry’s economic ecosystem.
We have been asking that question since 2014. The Third Circuit just made it louder.
Past The Wire prior coverage: “Kentucky Just Put The Jockey Club on Notice” (March 2026); “Kentucky Just Changed Everything” (April 2026)
They can win:
The Times They Are A Changin:
